You can grow algae with carbon dioxide and sunlight, but that doesn't mean it's free.

Although many believe that algae will become one of the chief feedstocks for diesel and even hydrocarbon-like fuels, growing large amounts of algae and then converting the single-celled creatures remains expensive, said experts at the National Biodiesel Conference taking place in San Francisco on Tuesday.

Algae biofuel startup Solix, for instance, can produce biofuel from algae right now, but it costs about $32.81 a gallon, said Bryan Wilson, a co-founder of the company and a professor at Colorado State University. The production cost is high because of the energy required to circulate gases and other materials inside the photo bioreactors where the algae grow. It also takes energy to dry out the biomass, and Solix uses far less water than other companies (see Cutting the Cost of Making Algae by 90%).

By exploiting waste heat at adjacent utilities (one of our favorite forms of energy around here), the price can probably be brought down to $5.50 a gallon (see Will Waste Heat Be Bigger Than Solar?). By selling the proteins and other byproducts from the algae for pet food, the price can be brought to $3.50 a gallon in the near term.

But that's still the equivalent of $150 a barrel of oil. "We we're excited in July [when oil was approaching that level]," he joked. "But we knew it wasn't sustainable."

It's only in phase II of Solix's business plan that it will be able to drop production costs to $3.30 to $1.57 a gallon, or around $60 to $80 a barrel. Solix has set a goal of cutting the cost of making algae by 90 percent.

Is algae a good feedstock? Yes, he insisted. Ultimately, algae could yield 5,000 to 10,000 gallons an acre, far higher than other feedstocks. Soy is only good for around 40 to 50 gallons an acre. Touted plants like jatropha might only produce 175 gallons an acre, he said.

But algae comes with trade-offs. Wild algae grows fast, but it doesn't yield tremendous amounts of oil naturally – two thirds or more of the body weight of wild algae will be proteins and carbohydrates instead of oil. Genetically modified algae can boost the oil content, but that slows the growth process. Closed bioreactors – i.e., sealed plastic bags placed in the sun -- cost more than open ponds, but it's tough to keep invasive species from taking over open ponds and out-competing algae optimized to produce oil.

"There's a dance between the growth rate and lipid content," Wilson said.

Much of the cost reduction for Solix will be accomplished through extraction techniques the company hasn't discussed yet. And algae companies will have to harvest everything their microorganisms produce.

"We don't have the solutions that are publicly discussed that give us the costs that we need," he said, adding, "The value of the co-products have to be captured and the value of the co-products could exceed the value of the oil."

Some companies, like Solazyme, are exploiting genetic science and fermenting techniques to accomplish the task. In fermentation, specific species of algae are locked into brewing kettles with sugars derived from old plant matter. When the time is right, Solazyme takes out the microbes and squeezes out the oil. It's cheaper to get large volumes of feedstock oil through fermentation than growing algae in ponds or bioreactors, said CEO Jonathan Wolfson. Genetically modifying the algae can boost the lipid, or oil, content to 70 percent of the organism's weight. In a sense, Solazyme practices indirect photosynthesis: the algae doesn't grow by having sunlight shone upon it but by eating sugars that were grown in the sun.

"Algae is by far the best organism on the planet for converting fixed carbon into oil," he said. "But economically, others are more efficient at taking sunlight and carbon dioxide and turning it into oil."

Solazyme says it will be capable of producing competitively priced fuel from algae in 24 to 36 months. Solazyme actually uses photosynthesis for growing some algae, but only higher value oils for the cosmetic or other industries.

Another, Phycal, is trying to harvest oil from algae without killing the algae. Instead, Phycal bathes the algae in solvents which can suck out the oil. Some strains of algae can go through the process four times or more.

"Think of it as milking algae rather than sending it to the slaughterhouse," said senior scientist Brad Postier. "By not killing the cells, we don't have to grow the biomass again."